Hi d.shankar,
The problem i'm still having is at some point, you will have to eval your decrypted code. At this point, any person with some php sense would be able to just echo whatever is sent to the eval function and that would be clear php text (except in obfuscation ofcourse, but can be interprete still).
What needs to be done is to modify the zend file parser process to accept two types of files, clear text php and encrypted php files (which can be identified by a possible fixed header in the encrypted file). Unfortunately this envolves serious understanding about zend (which i don't have, but am learning very quickly). You will need to give a custom php-release for each customer who will then be able to interpret your encrypted php code.
Will keep everybody updated as to my progress, but it's going slow, so anyone with more experience are welcome to help.